I get to know dozens of the non-governmental groups trying to help America's disadvantaged in my role at the Manhattan Institute's "social entrepreneurship" award program. And it keeps me wondering about what really works – what philanthropy does well, what government does well and what our "social policy" should be. As a lapsed liberal still worried about how to help (I might say uplift) the poor, a key point for me was writing, in City Journal, about my father's childhood: “How the Agency Saved My Father” (http://www.city-journal.org/html/9_2_how_the_agency.html).
Professionally, I’m vice president for policy research at the Manhattan Institute, and also director of our Social Entrepreneurship Initiative. My latest book, Philanthropy Under Fire, will be published in September, by Encounter Press. In addition, I’m a City Journal contributing editor. From 1987 through 2006, I served as director of case studies in public policy and management at the Harvard Kennedy School of Government, where I was also a fellow at the Hauser Center on Nonprofit Organizations. My writing on the nonprofit sector has appeared in The Wall Street Journal, National Affairs, Society Magazine, The Chronicle of Philanthropy and The Public Interest. I’ve also written widely on housing policy, including in my book The Trillion-Dollar Housing Mistake: The Failure of American Housing Policy (Ivan R. Dee, 2003), and the monograph Repairing the Ladder: Toward a New Housing Policy Paradigm (Reason Foundation, 1996. My previous lives include one as a documentary filmmaker at WGBH-TV in Boston, where my work won three Emmy awards.

The Long-Term Threat to the Charitable Tax Deduction

As the fiscal cliff looms, representatives of U.S. non-profit organizations are circling the wagons to defend the charitable tax deduction from Congressional action to cap or otherwise limit it. Well they should. The $300 billion, highest per capita among OECD nations, in annual philanthropic giving provides the lifeblood for medical research, higher education, the arts and a range of programs that assist and uplift the poor. Even a relatively modest change long-favored by the Obama White House—limiting the tax benefit of a charitable donation to 28 percent of its value, even for those paying higher tax rates—would, it’s been estimated, reduce charitable giving by 1.3 percent, or some $3 billion. An overall cap on tax deductions of all kinds could have even more drastic effects.

But beyond the immediate threat to the charitable deduction lies a far more serious one—the belief of increasingly influential groups that the deduction should be limited to specific types of causes. It’s the sort of apparent compromise that could quietly emerge from the fiscal cliff negotiations. Such a change would be a dangerous departure from American tradition, in effect making charity—the independent sector—little more than another arm of government.

Central to all this is the fact that the charitable deduction is today seen, along with the deduction for mortgage interest and state and local taxes, as just one more “tax expenditure”—foregone tax revenue that otherwise would go to the Treasury. In this understanding, income is, by default, taxable—and any limitations on tax liability must pass a test based on what is deemed to be in public interest. Increasingly, this is leading to the view that not all charitable contributions are created equal—and, indeed, that too few are directed to those providing direct services for those most in need, understood to be the underlying premise for the tax deduction.

This school of thought has long been championed by a relatively obscure but influential group called the National Coalition for Responsive Philanthropy, which is explicit in its view that charity should be directly targeted to “underserved communities” for purposes of “social justice”—and emphasizes the importance of philanthropy “benefitting economically disadvantaged people, the elderly, women and girls and other marginalized groups”. Moreover, NCRP sees the question of whether a charitable donation serves the public good as not to be left just to the discretion of donors. Indeed, it’s clear that it sees the public good as synonymous with grantmaking to community groups in low-income areas.

“NCRP believes that the public has a legitimate interest in the use of philanthropic resources. Donors receive the privilege of tax deduction for charitable donations and tax exemption on investments.. . . To strengthen democracy, grantmakers should provide sufficient resources to people and communities with the least wealth and opportunity. They should trust those in need and closest to the problems to play a powerful role in crafting and carrying out solutions, and they should provide support for civic engagement, policy advocacy and community organizing so that organizations working with and on behalf of marginalized communities can participate effectively in the public square.”

It is a view which is finding resonance as the question of how to structure the tax code is very much in play.

In a recent interview with Nonprofit Quarterly, Democratic Congressman Xavier Becerra, a member of the tax code-writing Ways and Means Committee, put it this way: “I start off with the proposition that if you’re getting a tax subsidy, another taxpayer must make up for what you’re not paying. That subsidy should serve a good purpose. . .Statistics I’ve seen suggest that only 1 in every 10 dollars are serving poor people or disadvantaged people. I have to wonder where the other 9 dollars are going.” Similarly, New York Times economics columnist Eduardo Porter has asserted that “philanthropy is pretty much unaccountable to society. Unfettered by democratic controls and dictated by the preferences of donors, it doesn’t have a great track record of devoting itself to our most pressing social needs.”

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